Does the Federal Reserve have an issue with its credibility? According to markets, that’s a strong yes.
The Federal Reserve is reportedly trying to make markets believe that it’ll keep increasing rates, that they’ll eventually “peak” at 5%, and that it’ll keep them there until the end of the year at the very least.
The problem is, investors refuse to accept that timeline. Officials for the Fed are arguing that the first two of those points aren’t the worst, but its lack of being able to convince Wall Street is messing with the Fed’s “tight” money story. According to the Chicago Fed measure, the thirty-year mortgage rate has bounced backward from about 7.1% to less than 6.5% in as little as two months. Overall, the financial situation is as insecure as they were at the beginning of June.
What’s making matters worse in the Fed’s seemingly desperate attempt to grasp the straws of inflation is that investors predict that rates will be cut earlier and quicker than policymakers are saying. If the markets are predicting correctly, interest rates could drop by almost two percentage points by late 2024. The Fed recently raised its peak rate estimate and suggested that post-peak cuts will slow down, and that hit stocks and lightly boosted Treasury yields. The markets aren’t even considering agreeing with policymakers as of right now, though.
For the moment, investors believe inflation is going to go away on its own and a severe recession can be avoided, which is shown by the rebound in regards to share prices and the decrease in additional yields required to purchase junk bonds over the past couple of months.
So why is everyone calling BS on the Fed?
According to some sources, it’s partly because of its fundamentals and on the other hand, credibility. It makes sense to go along with what the Fed is mustering up for the short term, but thinking about the long term, it’s seeming like the Fed wants the market to do the dirty work for it. There’s a genuine concern we’re facing right now, and the Fed is happy to give guidance without committing to a firm plan in order to keep rates higher for a longer period of time.